The legal structure of your business will affect how the business is taxed, how your assets are protected, and the cost of operating your business. It is important to understand what your business structure is currently.
There are four common business structures:
– Sole Trader;
If you are not certain what type of business structure your business currently has, you can put your Australian Business Number (ABN) into the Government search page (http://abr.business.gov.au/) and it will name the current entity type. You can also search by business name, but this will also include results for other business with names similar to yours. You can also use this search to gather information on other businesses you deal with, such as your debtors.
While there are some benefits to using sole trader or partnership structures in your business, these business structures carry some risks.
The major risk associated with operating as a sole trader is unlimited liability for the business’s debts. These debts may be through failure to pay a supplier, tax debts to the ATO, or a compensation claim from an employee or customer. If these debts are more than the business can afford, you, as the sole trader will be personally liable for them because you are not legally separated from the business. This may mean that you lose your home or car (or any other personally held assets) to pay this debt. As such, this business structure may not be suitable for someone who has a family to support (and needs security) or personal assets that they wish to protect.
A partnership is a structure where two or more people own the business together and share the profits. All partners can act on behalf of the other partners in business decisions. Like the sole trader structure, the partnership is not distinct from the business so each partner is personally liable for the business’s debts jointly and severally. This is one of the major disadvantages of partnerships – each partner is personally liable for the debts of the other partners. This may mean that your car or house has to be sold to pay a debt incurred through another partner’s actions.
Better Business Structuring
Structuring your business to operate through a company or trust offers much greater personal asset protection.
A company is a separate legal entity. All companies are governed by the Australian Securities and Investment Commission (ASIC) which oversees the compliance of companies pursuant to the Corporations Act 2001. Companies can either be ‘public’ companies which can raise funds by listing the company’s shares for trading on the stock exchange, or ‘proprietary limited’ companies that cannot do this. One of the major benefits of the company structure is the limitation of liability. As the Company is a separate legal entity, it can enter into business and loan agreements as a legal person itself. This means that the directors of the company are not personally liable for the debts of the company. Directors should however be aware that they may have liabilities if they personally guarantee debts of the company.
Operating your business through a trust is also an effective way to protect your personal assets. A trust is not a separate legal entity and is often used when running a business for the benefit of other people (i.e. children). In this structure, a person (called the trustee) operates the trust for the benefit of others (called the beneficiaries). This is a useful structure for those who wish to run the business for family members without requiring any involvement by the beneficiaries in the running of the business. Often the trustee will actually be a company, known as a corporate trustee, as this gives another layer of asset protection. The beneficiaries of the trust are generally not liable for the debts incurred through the running of the business.
Interested in learning more about Insolvency & Reconstruction?
Click on our recent articles to find out more: